Recent research from Roy Morgan reveals that nearly 1.5 million Australian mortgage holders, approximately 28.4% of all borrowers, are currently at risk of mortgage stress, defined as when repayments exceed a specific percentage of household income. This figure marks a 1.5 percentage point increase from the previous month, reaching its highest point since January, prior to the Reserve Bank of Australia (RBA) initiating interest rate cuts.
Despite the RBA’s reductions in interest rates in February and May, which were the first cuts in over four years, the level of mortgage stress continues to rise. In New South Wales, the situation is particularly dire, with almost one-third of homeowners affected, followed closely by those in Victoria and Queensland. Michele Levine, CEO of Roy Morgan, noted that while lower interest rates offer a temporary reprieve, they do not address the underlying issue of escalating loan amounts that burdens new buyers trying to enter the market. Many are resorting to larger loans amidst slow income growth, leading to increased financial stress.
The Australian Prudential Regulation Authority (APRA) has decided not to relax the mortgage serviceability buffer, which requires lenders to assess potential borrowers’ ability to manage repayments should interest rates rise by 3%. This buffer has remained unchanged since it was increased from 2.5% during the pandemic’s peak in October 2021, despite ongoing discussions about the necessity to lower it again. Recent calls from the Coalition and industry bodies suggest a return to a 2.5% buffer could open up home ownership opportunities for nearly 270,000 individuals, unlocking around $276 billion in additional borrowing capacity, especially for those aged between 25 and 34 years.
A report from the Finance Brokers Association of Australia indicates that alleviating the serviceability buffer could significantly mitigate mortgage stress, particularly in a climate where refinancing is becoming more commonplace. In light of the current economic conditions, a reduction in the buffer could provide a critical lifeline to many struggling borrowers, making the prospect of home ownership more achievable and sustainable.